Business Q&A

Question:
what happens to a deferred tax liability when an asset is sold?

Answer:
First of all a deferred tax liability was created when there were differences between the book treatment and tax treatment of an income or expense item.

In the case of an asset, typically tax depreciates faster than book and this leads to a lower tax basis in the asset than book basis. This is what creates a deferred tax liabiltiy.

When you sell the asset, the tax gain is higher than the book gain. At this time the deferred tax liability basically goes away.
However, it just doesn't disappear altogether, really what happens is that it is converted into a "current liability" on the balance sheet. In debits and credits, the entry when the asset is sold is:
Dr. Deferred Tax Liability (B/S)
Cr. Current Tax Liability (B/S)

Hope that helps.

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